AIZ – Divestor

Assurant – Hurricane Sandy Losses

Assurant (NYSE: AIZ) reported after-market hours today that their loss exposure to Hurricane Sandy will be $200-$220 million and this is the only insurable event that will cost them more than $5 million to date for the quarter. The quarterly (year-end) report is due in February 2013.

In after-tax terms, this translates into about $127-$140 million or about $1.60-1.76/diluted share. This is better than what I was expecting in terms of damage, although you could see this already baked into the market price when looking at a stock graph:

It became apparent that Hurricane Sandy would be causing significant damage to the New York area at the end of October and investors subsequently took the stock down farther than what was likely warranted.

In terms of capital reserves, Assurant’s holding company has $617.6 million in available capital as of the end of September, which they keep $250 million reserved away, so this upcoming loss, while unfavourable, is not going to interrupt the company from continuing to mint money with its share repurchase program. Needless to say, I still view Assurant as a very good opportunity at present for appreciation.

If the market decides to take Assurant’s stock price lower from present levels, I will continue to add to my position.

Assurant – Third Quarter

I went through the recent 10-Q of Assurant (NYSE: AIZ) and little has changed from my original investment assessment, mainly that the company’s equity should be trading higher than current market pricing.

There continues to be some risk on their lender-placed insurance business (which is a fancy way of describing mortgage providers putting home insurance on delinquent housing owners) as AIZ was forced to take a 30% rate haircut in California starting at the beginning of 2013. There will likely be price concessions in other states which will cut into the company’s profitability, but as the housing market in the USA starts to improve and the number of underwater mortgages continues to decrease, this revenue stream was likely to slow down regardless. The specialty property segment produced a combined ratio of 76.5% for the first 9 months of 2012 and this ratio is very likely to increase in 2013.

Their health insurance unit is at 97.2%, while employee benefits is at 106.4%.

Even with the premium haircut from their specialty insurance business, they are very likely to continue generating cash at a rate where they can continue repurchasing their undervalued shares at a significant discount. At the current share price, buybacks become extremely accretive. Since the company’s book value is about $54.05/share when excluding intangibles, each dollar of shares purchased (at the current market value of $38) is the equivalent of receiving $1.42 of value, plus the organic earning capacity of the company, which is very high relative to price.

The company is trading at the rate it is because of continued fears that regulators will continue to encroach in the profitability of the business in addition to industry-wide concerns (e.g. earnings yields from their investment portfolios) but there is a lot of margin of error for this one. When considering that the amount of raw income the company produces in the first 9 months of 2012 was nearly the same as the net income of the entire 2005 fiscal year (when the stock prices were trading at relatively the same price), coupled with the fact that average shares outstanding went from 136 million to 86 million, gives some hints as to what I believe the market value of this firm should be.

Assurant

Assurant (NYSE: AIZ) is a diversified insurance company with the majority of its profits in the specialty property market.

When looking at the metrics, the company is in very good shape financially and taking all of its assets and liabilities at face value, you have a corporation with a tangible book value of about $49.13/share, using the June 30, 2012 share count. When considering the market value of the shares are about $34/share and considering the company is slated to earn about $6/share in this fiscal year, it makes you wonder why the market is so severely underpricing the company.

There has been persistent stories for the past couple years from state regulators that have been pursuing the company over pricing of its forced-placed insurance, which are policies that are written when a homeowner no longer has insurance on his mortgaged properties – the lender can place the policy on the home to insure their (financial) interests in the property. The forced place policies were apparently too profitable for the firm.

If this turns into a reduction of premiums, or penalty, or both, it will have a material impact on the company’s financial statements, but there is a huge valuation cushion that makes it seem unlikely it will go beyond the large discount presently placed on the shares of the company.

Notably, the company has been buying back its own stock in a very aggressive manner. The following are the basic shares outstanding as of the end of the quarter:

Q3-2010 106,474,301
Q4-2010 102,000,37
Q1-2011 97,931,049
Q2-2011 94,994,982
Q3-2011 92,926,138
Q4-2011 88,524,374
Q1-2012 86,508,372
Q2-2012 82,392,454

On July 26, 2012, the company had 81,084,645 shares outstanding.

Normally I am not a fan of management buying back its own stock, but when a company is trading at 30% below tangible book value, every dollar spent on its shares purchases about $1.43 of value. Assuming you have your assets and liability structure correctly calculated, each share purchased increases the book value further. Considering that the company has historically generated cash at an impressive rate, it makes a compelling value argument.

The risk in this company appear to be in the regulatory aspects of their property insurance. It almost reminds me of what happened with Philip Morris (now Altria Group, NYSE: MO) back in the early 2000’s when they were in the middle of their litigation with the US government. Although their business metrics were fantastic, their shares relative to the valuation were in the gutter. This appears to be the same case with Assurant.

One technical analysis negative is that the company is a listed S&P 500 component. Since its market cap is well under the prescribed $5 billion level, it may get demoted to the midcap index – this typically causes a rush of advance selling as traders anticipate the supply dump from index funds removing the component. It would probably be a good time to make an entry at this point.

That stated, I am a little impatient and started a position around $34/share. I normally do not deal with S&P 500 companies, but sometimes I do make exceptions.